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Top Expert Offers 6 Reforms to Fix Illinois’ Deficit Crisis

Despite their spectacular fiscal failure, lawmakers in the Land of Lincoln are showing little sign of progress in breaking the deadlock, now nine months past the deadline. Since then, Republican Gov. Bruce Rauner has been holding out for a package of business incentives and changes in collective bargaining laws that a Democratic-controlled legislature wants no part of.

The state’s controller, Leslie Munger, has estimated the backlog could top $10 billion by the time the current fiscal year ends in July. That money that will have to be made up in next year’s budget, which is technically due July 1.  “The bottom line is the state cannot go bankrupt and we cannot print money,” Munger told reporters last month. “Taxpayers are going to have to pay this bill.”    Fears that Chicago’s large property tax increase last year is only the tip the iceberg may be one explanation why Chicago was the only one of our 20 largest cities to have a population decline.

The implications of more people leaving the state is ominous–without structural reforms to our budget mess, we face a vicious downward spiral with fewer taxpayers footing ever larger tax bills.  On April 11, 2016 the credit rating agency Fitch cut Chicago’s rating by two notches to BBB-, one step above junk status, citing the recent court rulings. And other credit agencies are warning of further downgrades to Illinois’ credit, already the lowest of the 50 states.

Even though many believe that Governor Rauner and Speaker Madigan will be forced to agree on some kind of budget compromise after the November election, it will do nothing to address our current enormous deficits and growing pension liabilities.   A mid-April article by Donna Arduin published in the Illinois Policy Institute is both timely and important for the state’s future.  Ms. Ardiun, a partner in Arduin, Laffer & Moore Econometrics, is one of the nation’s most successful veterans of state budget management and tax reform.  She has served as budget director for four different former governors who, after getting her long-term policy changes passed, all consistently received high marks on the Cato Institute’s fiscal report cards during her tenures with their administrations.

Ms. Arduin’s 6 recommendations for Illinois are:

A stronger balanced budget requirement

According to the National Conference of State Legislatures, 43 states including Illinois, require a governor’s proposed budget to be balanced, 40 states require the state legislature to pass balanced budgets, and 37 ensure that budget deficits cannot be pushed off into the next year.

Illinois’ constitutional requirement for a balanced budget, however, is full of loopholes and has become meaningless.   A strong bipartisan effort is needed to put real teeth into this law. 

Biennial budgets

Nineteen states, including Indiana, Kentucky, Minnesota, Ohio and Wisconsin, pass a state budget every two years instead of every year. In addition to eliminating the potential for protracted budget fights every year, this timeframe would allow lawmakers to pass budgets in nonelection years, which would minimize delays for political purposes.

Importantly, governors and legislatures have more time to focus on policy reforms, which are often instrumental to long-term solvency, in nonbudget years. Several states with two-year budgets have AAA credit ratings, and they tend to outperform other states economically and to be more fiscally stable. 

Reasonable pension protection

Some state constitutions protect government employees’ already-earned pension benefits. Illinois courts have ruled that the state’s constitution not only protects already-earned pension benefits, but also those that government workers have not yet earned. That carries a high price tag for taxpayers and squeezes out spending for core government programs and services.

Illinois should amend its constitution so it can reform government workers’ unearned  retirement benefits going forward. In the meantime, the General Assembly can pass several reforms that would help reduce the impact of the state’s pension crises. 

Professional revenue and spending assumptions

Illinois’ constitutional balanced-budget language gives the General Assembly the ability to make revenue and spending assumptions, which essentially allows politicians to make unrealistic or inaccurate assumptions about how much money the state will have to spend. Those tricks were in clear view when legislators passed a 2015 budget they conceded was out of balance the day it was signed. The 2016 budget that Rauner vetoed did not even balance on paper. 

Other states prevent midyear deficits with official revenue- and expenditure-estimating conferences. Conferences consist of economists and budget professionals from the executive and legislative branches with the advice of external experts and national economic forecasts. The governor and legislature are required to use official estimates for revenues and spending programs, as well as official estimates for proposed spending reforms and revenue changes. 

Ending bill backlogs and building a rainy day fund

Illinois should enact a budget-stabilization mechanism that serves to pay down any unpaid bills and creates a rainy day fund. Such a program would require the General Assembly to set aside a portion of any revenues over and above expected revenues for use to pay down the state bill backlog.

After eliminating the backlog, the state would dedicate half of above-trend revenues to a rainy day fund. The state could only make withdrawals from the fund in fiscal or health and safety emergencies. 

End mid- and late-year budget fights and uncertainty for providers

Other states’ laws give the governor authority to declare fiscal emergencies in the event of unforeseen lower revenue or higher expenditures. Even official estimating conferences may not foresee a national economic crisis such as 9/11, or a natural disaster.

In some states, the governor can adjust the budget’s spending plan in order to fix a mid-year problem without legislative approval if the legislature is out of session. In other states, the governor can send the legislature a plan to address a fiscal emergency through expenditure reductions or use of the rainy day fund. In these cases, a joint committee of the legislature must be given a defined period of time to make changes to the proposal or it becomes law.

Arduin, Laffer & Moore Econometrics has only been hired by Republican governors thus far.   With a Republican governor, all of us must petition Governor’s Rauner to hire that firm as an important step in the right direction.  For those of us whose livelihoods and families are tied to Illinois, the stakes could not be higher.

 

Robert Hoyt, Ph.D.
President
Allied Health Professionals LLC

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